A private equity fund invests $100 million in a venture company that is sold for $130 million. It also invests $100 million in an LBO that goes poorly and is liquidated for $80 million. 1. If the carried interest incentive fee for the GP is 20% and there is no clawback provision, what is the investor's return after incentive fees, assuming the investment outcomes are realized in the same year: a under an American-style (deal-by-deal) waterfall structure? b. under a European-style (whole-of-fund) waterfall structure?
A private equity fund invests $100 million in a venture company that is sold for $130 million. It also invests $100 million in an LBO that goes poorly and is liquidated for $80 million. 1. If the carried interest incentive fee for the GP is 20% and there is no clawback provision, what is the investor's return after incentive fees, assuming the investment outcomes are realized in the same year: a under an American-style (deal-by-deal) waterfall structure? b. under a European-style (whole-of-fund) waterfall structure?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:EXAMPLE: Waterfall structure and clawback provision
A private equity fund invests $100 million in a venture company that is sold for $130 million.
It also invests $100 million in an LBO that goes poorly and is liquidated for $80 million.
1. If the carried interest incentive fee for the GP is 20% and there is no clawback provision, what is
the investor's return after incentive fees, assuming the investment outcomes are realized in the
same year:
a under an American-style (deal-by-deal) waterfall structure?
b. under a European-style (whole-of-fund) waterfall structure?
2. How would the answers be affected if the venture investment was sold in year 1 and the LBO
investment was sold in year 2?
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